Thursday, April 23, 2015

Yellow Pad Report

This week's Santa Clara Economics Department seminar was presented by Giovanni Peri, who took the Amtrak down from his home department at UC-Davis. He presented his latest paper on a topic he has been studying for some time now: the effect of immigration on native-born workers. The paper, with Mette Foged, analyzes an extraordinarily rich longitudinal data set of Danish workers.

As is the case in the United States, low-skilled workers are overrepresented among recent Danish immigrants. The most basic "Econ 101" analysis would predict that these low-skilled immigrants would compete with native-born low-skilled workers, increasing the supply and depressing the wage along the demand curve. Indeed, one of the most influential economists working on immigration effects, George Borjas, has a paper elaborating on precisely this claim, entitled "The Labor Demand Curve is Downward Sloping."

Well I'm sure Giovanni would agree that the demand curve slopes downward, but it turns out that immigration does not necessarily drive down the wages of low-skilled native workers. In fact, as his new paper shows, low-skilled Danes actually benefited from the waves of low-skilled refugees who settled in Denmark after 1995. The reason appears to be that as low-skilled foreigners filled jobs as manual laborers, many Danes who had held these positions were upgraded to new jobs that were complementary to the manual labor and actually paid a little better. For example, a construction laborer might have been upgraded to foreman to supervise the new foreign workers. Thus the effect of the shift in supply of low-skilled workers was more than offset by a shift in the demand for low-skilled native workers. This is a recurring theme of Giovanni's work: low-skilled workers are not homogeneous, and in particular native-born and foreign-born workers are not perfect substitutes.

The beauty of the paper is in the empirics. Studying immigration effects is notoriously challenging because of the endogeneity problem– determining the direction of causation. For example, suppose we observe immigrants flooding into a city or region, and wages rising at the same time. Can we conclude that immigrants caused the wages to rise? Or is it the reverse: that a growing regional economy, with increasing labor demand and rising wages, attracted the flow of immigrants to those employment opportunities?

Giovanni's solution to this tricky problem exploits some special features of the refugee flows to Denmark and some details of Danish refugee policy, along with careful application of modern panel econometrics. A fine paper cogently and enthusiastically presented, with interesting lessons for immigration policy.

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